Power firms miffed with tariff policy

Power sector majors are unhappy with certain aspects of the tariff policy proposed by the power ministry.

What have raised their hackles are the guidelines on transmission pricing, regulation of interest rates for project-lending and the uncertainty over whether the regulation will be applicable to new plants.

"It is not clear whether these tariff regulations will apply only to future projects or not," said an executive in a public sector power company.

On transmission pricing, the draft tariff policy says that a national tariff framework, sensitive to distance, direction and related to the quantum of power flow (as instructed by the National Electricity Policy), be developed by the Central Electricity Regulatory Commission(CERC) and implemented before April 2006.

"While the principle cannot be argued against, the time is not right to introduce distance-based transmission tariffs. At a time when there is a shortage of power, such a pricing policy will make tariff of far-off plants unviable," said the official.

The policy is, however, based on a more rational transmission pricing system.While tariffs would have to be adjusted, the changes would not be very sweeping, power ministry officials told Business Standard.

States would be consulted and informed about the extent to which their tariffs would change before they could be expected to view the matter, the officials added.

In an attempt to decrease project costs and share benefits with consumers, the draft also suggested that it was desired that the agreement with lenders have a provision for re-fixing interest rates after every three years.This would reduce the interest rate risk on project developers.

"This proposal has been made envisaging a falling interest rate scenario. If, however, interest rates are on a long-term upward trend, it can increase the burden on the developer," said power sector executives.

The policy says that the CERC may determine a suitable ceiling on allowable interest rates, considering the type of project, market conditions and credit worthiness of the borrower.

Return-on-equity in generation and transmission projects shall conform to the overall risk assessment and cost of capital. If a company invests premium raised while issuing share capital or internal resources from the free reserves in capital expenditure, it shall be included while calculating return on equity. Companies will, however, prefer a return-on-investment rather than on equity.

One of the positive aspects of the draft, companies say, is the provision calling for aligning the repayment period of long-term debt with the permissible depreciation rates.

The move will reduce front-loading of tariff, according to the draft. Capital investments required for renovation and modernisation (R&M) to be covered in the multi-year tariff should be assessed after thorough scrutiny, including public hearings.

The power companies said the issue of R&M expenditure was a technical one and should not be decided in public domain.

Pointers on draft tariff policy

THE PROPOSAL

A national tariff framework, sensitive to distance and related to the quantum of power flow be developed

Agreements with lenders should have a provision for re-fixing interest rates after every three years

Return-on-equity in generation and transmission projects shall conform to the overall risk assessment

THE CRITICISM

At a time when there is a shortage of power, such a pricing policy will make tariff of far-off plants unviable

If the interest rates are on a long-term upward trend, it can increase the burden on the developer

Power companies have said they would prefer a return-on-investment rather than on equity